It's the income statement and the earnings miss that is getting all the attention at Jos. A. Bank
Before diving into the financials, I think this quote from CFO David Ullman in the company's press release deserves some attention: "While our sales of new transitional spring products remained consistent with last year, gross profits declined primarily as a result of increased customer demand for fall merchandise, resulting in less demand for the year-round core merchandise."
This is interesting, because I seem to remember the company stating on its conference calls that having high levels of inventory wasn't a real risk, because the company deals in staples that don't go out of style. This may still be the case, but I am now wondering whether the company's high inventory levels and poor cash flow have finally caused it to discount out-of-season items rather than putting them in mothballs for six to nine months and bringing them back out.
I've written about this before, and other Fools have as well, but given that this is the first time Jos. A. Bank has missed earnings in some time, it's worth taking another look at the company's balance sheet and working capital management. Here is a look at some of the balance sheet items for Jos. A. Bank this quarter with a year-over-year comparison.
Assets |
1Q 2006 |
1Q 2005 |
Change |
---|---|---|---|
Cash + ST Invest. |
$852 |
$2,137 |
(60.1%) |
Accounts Rec. |
$7,918 |
$9,080 |
(12.8%) |
Inventory |
$184,005 |
$144,614 |
27.2% |
Liabilities |
1Q 2006 |
1Q 2005 |
Change |
---|---|---|---|
Accounts Payable |
$35,168 |
$42,724 |
(17.7%) |
Long-Term Debt |
$17,410 |
$15,709 |
10.8% |
Having looked at the data over the years, I'd say the biggest concern continues to be the company's working capital management, particularly inventory. Its working capital management, or lack thereof, continues to drive the company's cash conversion cycle higher, as can be seen in the table below.
Fiscal Year |
CCC in Days |
---|---|
2005 |
266.6 |
2004 |
250.6 |
2003 |
229.5 |
2002 |
226.4 |
2001 |
173 |
The difficulty with Jos. A. Bank is that you can't directly compare its cash conversion cycle to companies like Nordstrom
The bottom line is that a company has some leeway with what earnings it reports, and companies showing high levels of growth are the companies that deserve more scrutiny, not less. Most often there is reason to be suspicious of rapid growth when it comes at the cost of a weak balance sheet. What it looks like we're seeing with Jos. A. Bank is that eventually the quality of earnings does matter.
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At the time of publication, NathanParmelee had no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.